The value of Venture Capital and Private Equity investors to shareholders
in listed firms
Wei-Huei Hsua , Sian Owenb and Jo-Ann Suchardc
We examine how shareholders in listed firms with prior Venture Capital (VC) and Private
Equity (PE) investment, value the ongoing involvement of these investors in the firm after
listing. Unlike the U.S market, Australian VC/PE funds sell their holdings in listed firms in
the market rather than distributing shares directly to their investors and have much longer
lockup periods. Most Australian VC/PE funds retain a stake in their portfolio firm after
listing and many VC/PE managers hold a seat on the board of directors. We examine the
market reaction to the announcement of changes in the shareholdings of VC/PE funds and the
resignation of VC/PE managers from the board. We find that buy transactions have a positive
market reaction and sell and exit transactions, a negative market response. In addition, the
market reacts negatively to the resignation of directors that represent the VC/PE investor,
from the board. The results suggest that VC/PE funds are believed to have a positive
influence and create value in their portfolio companies, from which the funds themselves and
other shareholders benefit. The market reaction varies according to the shareholding of the
VC/PE fund, fund reputation and director tenure.
Keywords : Venture capital, private equity
JEL: G32, G24.
a
School of Economics and Finance, Massey University, E-mail address : W.Hsu@massey.ac.nz
b
School of Banking and Finance, Australian School of Business, UNSW, Sydney NSW 2052 Australia, Tel.:
+612 9385 4412; fax: +612 9385 6347. E-mail address: sian.owen@unsw.edu.au
c
School of Banking and Finance, Australian School of Business, UNSW, Sydney NSW 2052 Australia, Tel.:
+612 9385 5876; fax: +612 9385 6347. E-mail address: j.suchard@unsw.edu.au.
1
1. Introduction
Both theoretical and empirical research in the US and Europe is consistent with the
proposition that Venture Capital and Private Equity (VC/PE) funds add value to their
portfolio companies (Gompers and Lerner, 1999, 2001; Lerner, 1999, 2002a, 2002b; Kortum
and Lerner, 2000; Hege et al., 2003; Gompers et al., 2005). In contrast to other financial
intermediaries, the VC/PE fund takes an active role in the development of the investee firm.
In addition to providing funding, VC/PE managers serve their investee firms through
coaching and guidance, networking for strategic alliances, and attracting further capital
(Bygrave and Timmons, 1992; Hellmann and Puri, 2002).
VC/PE funds are frequent participants in the capital markets as a method of exiting from their
investments (Lerner, 1994). Empirical observations suggest that they choose the exit channel
strategically and build up reputation primarily through successful initial public offerings
(IPOs) (Gompers, 1996). VC/PE funds tend to hold significant ownership and board positions
(Barry et al., 1990), and continue to be involved in the firm after going public (Megginson
and Weiss, 1991) and thus may provide access to capital even in the post initial public
offering (IPO) period. Finally, VC/PE funds tend to put effective management structures in
place, which assist in superior long run performance (Brav and Gompers, 1997).
One way to assess the value of VC/PE investor involvement in the firm after listing (post IPO)
is to examine how the market reacts when the VC/PE investor changes their shareholdings in
the firm or resigns from the board of directors. VC/PE funds closely monitor their portfolio
companies’ performance, are actively involved in the management of these firms before
2
listing 1 and can remain involved in the firm post IPO. Thus, they potentially have an
informational advantage compared to other investors such as institutional investors, who are
not actively involved in the management of the firm. We argue that as VC/PE managers are
actively involved in the firm, the market should react negatively to each exit event following
the IPO, as the positive influence and value creating mechanisms of the VC/PE fund leave the
portfolio company with each share sale and director resignation.
However, the ability to assess the impact of continuing VC/PE ownership in the firm after
listing is restricted by the limited disclosure requirements for these types of investors. In the
U.S, only insiders (directors, officers) and owners of at least 10 percent of a class of equity
securities have to disclose transactions no later than the second business day (or no later than
the tenth day of the month after the transaction, pre 2002). Further, rather than selling their
shares in the market, many VC firms in the U.S distribute these shares to their investors
(limited partners). Such distributions, and the subsequent open-market sale of the distributed
shares, need not be reported to the SEC. (Gompers and Lerner, 1998) and thus it is not
possible to examine directly the trading behaviour of VC firms (Bradley et al., 2012).
Thus, while there is a substantial literature on the IPO exit decisions of VC/PE funds (see Da
Rin et al., 2011 for a survey), there is limited evidence on the post IPO transactions of VC/PE
funds. The empirical evidence has focused on abnormal returns around the expiration date of
lockup periods for VC/PE funds rather than on the market response to actual share
transactions (Bradley et al., 2001; Field and Hanka, 2001; Brav and Gompers, 2003; Bradley
et al., 2012).2
1
For example, VC/PE investors remove existing inefficiencies by restructuring the operating business,
governance structures or strategic orientations (Kaplan and Strömberg, 2009; Acharya et al., 2013).
2
The exception is Fürth and Rauch (2014) who examine U.S post IPO buyout exits.
3
However, the Australian market has a number of features that allow an examination of the
impact of VC/PE funds on the firm post IPO. Firstly, unlike the U.S, Australian VC/PE funds
can completely divest their holdings at IPO (although only approximately a third do so).
Secondly, Australian VC/PE funds sell their share holdings in their listed portfolio firms and
distribute the proceeds to their investors (limited partners). In comparison in the U.S, many
VC firms distribute shares in the listed portfolio firms to their investors (limited partners).
Such distributions, and the subsequent open-market sale of the distributed shares, need not be
reported to the SEC. Further, Australian VC/PE funds are subject to a much longer lockup
period than US markets. US markets typically have lockup periods of 180 days for VC funds
(Bradley et al., 2001; Field and Hanka, 2001; Bradley et al., 2012) compared to one year for
Australia (the lockup period was two years before 2002). Thus, Australian VC/PE funds
remain invested for much longer periods post IPO than U.S VC funds and are often
substantial shareholders in the listed firm. In addition, there is a requirement for substantial
shareholders (who hold more than 5% of the outstanding shares) in listed firms to disclose
any changes in their shareholdings to the stock exchange within two days of the transaction.
This requirement provides a unique opportunity to analyse the direct impact of a change in an
investor’s holding (such as a VC fund) around the time that the transaction occurs.
We use a sample of Australian listed firms that VC/PE funds have taken public and not fully
divested their holdings at the IPO. We examine the market reaction to the change in
shareholdings of VC/PE funds in their portfolio firms after they have listed on the stock
exchange. That is, we analyze the market reaction to buy and sell transactions of VC/PE
funds in the firms that they have previously taken public. Owen and Suchard (2012) find that
most Australian VC/PE funds retain a stake in the firm (only 28.75% of VC/PE funds divest
4
their holdings at the time of the IPO), and the average ownership after listing is 12.68% of the
firm. This allows us to analyze the value that shareholders place on VC/PE funds in the firm.
In addition, many VC/PE managers hold a seat on the board of directors of their investee firm
after the IPO. The decision of the VC/PE manager to resign from the board allows us to
evaluate the value that shareholders place on the ongoing role and influence of VC/PE
managers on the board of directors. The analysis also provides an alternative means of
examining the value of Australian VC/PE funds to their investee firms. Research on the
impact and value-add of Australian VC/PE funds to their portfolio firms has been hampered
by the lack of publically available data for private firms.
The Australian VC/PE market has received little attention in the academic literature. It has a
legal and institutional structure similar to most common law countries where VC/PE markets
have been the subject of much study (including Canada, the UK and the U.S), but is a
relatively younger market. Investment in Australia VC/PE funds has increased 348% in the
last decade (Australian Bureau of Statistics), yet accounts for only 0.58% of GDP compared
to 1.8% of GDP in more mature markets such as the U.S (Probitas Partners, 2009). Australia
only accounts for 1% of the global VC/PE market but is a significant part of the fastest
growing region, representing around 14% of regional funds (Probitas Partners, 2009).
A significant difference between the Australian and U.S venture market is in the overall level
of pension commitments. Australia’s pension fund investment has been more conservative in
nature and the proportion of investments in VC/PE has been below that of pension funds in
the U.S. The Australian pension industry in total invests approximately 2-3% of their assets
in VC/PE, compared with U.S evidence that suggests that 5–10% is the norm (Gompers and
5
Lerner, 1998). The comparative dearth of pension fund investment in VC/PE in Australia is
comparable to other developing VC/PE markets around the world (Jeng and Wells, 2000).
We find that where VC/PE funds buy additional shares in their portfolio firms that have
previously listed, there is a positive market reaction. In contrast, sell and exit transactions, are
met with a negative market response. In addition, the market reacts negatively to the
resignation from the board, of directors that represent the VC/PE investor. These results
suggest that VC/PE funds are believed to create value in their portfolio companies, from
which the funds themselves and other shareholders benefit. As soon as the VC/PE investor
leaves the portfolio companies, this value creation process ends. Hence, investors discount
the lack of future value creation by the funds from the portfolio companies’ share values as
soon as they discover that fund managers are divesting from the portfolio company.
2. Methodology
We identify 94 VC/PE backed IPOs that listed between 1996 and 2009, from Venture Expert,
Capital IQ and from shareholder information in prospectuses obtained from the Connect4
database and FinAnalysis.3 We identify 70 IPOs where the VC/PE investor/s did not sell out
at IPO. We use the IPO prospectus and post IPO disclosures to the Australian Stock
Exchange (ASX) to identify 41 firms where the VC/PE investor retains a substantial
shareholding in the firm post listing4. Substantial shareholders5 are required to inform the
ASX of changes to their shareholding within two business days. We use these Form 604
notifications to identify the buy and sell transactions of VC/PE funds post listing. VC/PE
3
This is a similar sample size to Cumming and Johan (2013) who use 91 public VC/PE backed firms.
In 29 firms, VC/PE investors hold less than 5% in the firm post IPO and thus do not have to disclose changes
in their holdings.
5
The Corporations Act defines a ‘substantial holding’ in shares as being a ‘relevant interest’ of 5% or more (of
the voting power of those shares) under the control of a shareholder and/or his associates
4
6
investor transactions are included in the sample only if the VC/PE fund originally invested in
the firm before IPO. In addition, we use announcements to the ASX of the appointment or
resignation of directors and their shareholdings at the time of appointment or resignation. The
details of the transaction are hand collected from the announcements to the ASX accessed
using the Finanlaysis database.
A change in shareholding notification or director appointment/resignation is included in the
sample if there are no other significant announcements in the two day period around the
notification. This allows us to identify the market reaction to the change of shareholding or
director without being impacted by other firm specific information. The sample includes 90
buy and sell transactions by VC/PE funds in 41 firms and the resignations of 26 directors in
21 firms between 1998 and 2011.
The market model is used to estimate abnormal security returns associated with the
announcement. The intercept and slope coefficients in the market model are estimated over a
150-day period, from day t-210 to t-61, relative to the announcement day (t=0). The
announcement day is defined as the date of the change in shareholding notification to the
ASX. If the notification is made after market close, the announcement day becomes the next
trading day. An announcement is excluded from the sample if the firm is not traded in the 3
day window around the announcement. The final sample for the event study includes 78
transactions. As the Australian market suffers from thin or non synchronous trading, we use
the Scholes-Williams beta estimation for the market model as well as ordinary least squares
beta estimation. The market index is the value weighted index All Ordinaries index and we
use a Rank test as well as a Generalised sign test due to a small sample size. Share price and
the market index returns are accessed from Datastream.
7
As the sample size is small, we use a regularized regression model. We include a number of
variables to analyze the market reaction to share transactions of VC/PE funds. These include
VC/PE and deal transactions sourced from Venture Expert and Capital IQ, and firm and
transaction characteristics from Finanalalysis. These variables are only available for 57
transactions. We control for the type of investor where PE is a dummy variable equal to one
if the investor is classified as a PE manager or fund. We proxy for fund reputation using the
size of the fund in USD, as larger funds are considered to be more experienced and reputable
(Gompers, 1995; Gompers and Lerner, 2000; Krishnan et al., 2011 and Atanasov et al.,
2012). We include a dummy variable for whether the VC/PE investment was syndicated (that
is, there was more than one VC/PE fund investing in the firm), whether the VC/PE investor
has a seat on the board of directors at listing and the number of rounds of financing that the
firm received. In terms of firm characteristics, we control for the leverage of the firm
(measured by the ratio of total liabilities to total assets at the year-end prior to the transaction)
and the size of the firm (measured by the number of shares outstanding multiplied by the
closing share price on the day before the transaction).
For the change in shareholdings transactions, we capture the change in ownership percentage
of the VC/PE investor (measured as the difference in percentage shareholdings prior to post
transaction as disclosed in the change in substantial shareholding notice), the ownership of
the VC/PE investor after the transaction, the number of years between the transaction and the
listing date and the holding period of the VC/PE investor (the number of years between the
transaction date and the initial investment in the firm by the VC/PE investor). For the director
resignation announcements, we additionally capture the tenure of the director (measured as
the number of years between appointment and resignation) and the shareholding of the
VC/PE investor at the time of resignation.
8
3. Results
3.1 Descriptive statistics
The sample comprises 41 VC/PE backed firms that listed on the ASX between 1996 and
2009. The majority of these firms are backed by VC funds (64%). Firms in the healthcare
sector account for the largest industry group (25%) followed by mining (20%) and
telecommunications and information technology (15%).
There are 28 VC/PE funds represented in the sample. Of these 36% are classified as PE funds
(where either the firm or the fund is classified as PE). VC/PE funds sell part of their
investment at the IPO in 15% of sample firms. The average shareholding of VC/PE funds is
24.5% pre and 14.1% post listing. VC funds tend to have a higher ownership in the firms post
listing than PE funds (15.9% vs 10.7%). The VC/PE investor is represented on 59% of the
IPO boards post listing, although more VC funds tend to sit on the investee boards than PE
funds (57% vs. 41%).
The VC/PE managers in the sample have an average USD 323 M of funds under management
and the average fund size is USD 55 M. PE managers have higher funds under management
(USD591M vs USD189M) and larger fund sizes (USD90M vs USD38M) consistent with
general differences in the VC/PE industry. The VC/PE manager (fund) is on average 6 (2)
years old when they first invested in the firm. Syndicated investments account for 29% of the
deals with a firm receiving 2.6 rounds of financing on average.
Table 1 describes the characteristics of the transactions.
9
<Insert Table 1 here>
Panel A provides the characteristics for the change in shareholdings announcements. There
are 29 buy transactions, 41 sell transactions and 20 exits of the VC/PE investor where their
holdings are sold down to zero. The PE funds in the sample do not reinvest in their portfolio
firms post IPO as most of the buy transactions (96.7%) are executed by VC funds. Sell
transactions result in a larger change in ownership (decrease by 5.96%) than buy transactions
(increase by 3.08%). VC/PE funds own on average 24% of the firm after buy transactions
compared to 10.3% after sell transactions. On average transactions take place just over two
years after listing. VC/PE backed IPOs were subject to a two year mandatory escrow period,
which was amended to one year in March 2002. For sell transactions before March 2002, the
average time held after IPO is 2.5 years and is 1.7 years after March 2002. This is consistent
with US results for PE/buyout firms where Fürth and Rauch (2014) show that buyout funds
stay invested in their portfolio companies for an average of 2.7 years after the IPO (where the
lockup periods for buyout funds is two years).
The average holding period for VC/PE funds is just under five years for sell downs of their
holdings and slightly over five years for complete exits. The sample firms have low leverage
on average (0.27) with firms for buy transactions having lower leverage than sell
transactions. Similarly, the market capitalization of firms for buy transactions is lower than
sell transactions possibly reflecting the fact that VC backed firms that list on the ASX tend to
be smaller than PE backed firms (Owen and Suchard, 2012).
10
Panel B provides the characteristics for the resignation of director announcements. There are
26 director resignations in the sample. On average, 1.53 board seats are held by VC/PE funds
at the time of the IPO. The director that represents the VC/PE investor, sits on the board for
just under three years. This is consistent with U.S evidence for PE funds in Fürth and Rauch
(2014). The VC/PE investor owns on average close to 10% of the firm at the time of
resignation from the board and the majority of the resignations are for directors that represent
VC firms/funds (62%).
3.2 Event Study Results
Table 2 presents the results for event study of the change in shareholding announcements.6
The results suggest that the market responds favorably where VC/PE funds purchase
additional shares in the firm. The return on the announcement day is significantly positive
(1.59%) as well as over the two and three day announcement period (0,1) and (0,2). This
suggests that the market values the increased shareholding and ongoing influence of VC/PE
funds as substantial shareholders in the firm
<Insert Table 2 here>
In comparison, there is a delayed response when VC/PE funds sell down their shareholdings
in the firm. 7 The return on the announcement day and day 1 is insignificant but is
significantly negative on day 2. Similarly, there is a delayed response to exit announcements
where the return on day 1 is marginally significant. This may be driven by the small sample
6
There are 20 buy, 26 sell and 11 exit transactions in the event study as not all firms traded around the
announcement dates.
7
This may be due to delayed notification as the ASX requires substantial shareholder notification within 2 days
of the transaction.
11
size or that a sell transaction is one in a potential series of sales by the VC/PE funds, and thus
later transactions are less of a surprise and do not have a significant impact.8 The results for
sale transactions are consistent with Fürth and Rauch (2014) for U.S buyout funds who find a
significant negative reaction of -1.43% in the period (-1,1) and that the market reaction
reduces with sales later on in the divestment process. In addition, there is some evidence that
VC/PE funds may time the purchase/exit of shares as the pre event returns over (-10,-2) are
significant.
Column 4 in Table 2 presents the results for event study for the announcements of director
resignations. There is a significant negative response to the director resignation on the day of
the announcement. This suggests that shareholders value the contribution to the firm that
VC/PE funds make through their representation on the board.
The negative reaction to the sale of shares by VC/PE funds suggests that VC/PE funds create
value in their portfolio firms’ and thus when they divest their holdings, the market discounts
the share price to reflect the loss of future value creation. An alternative explanation may be
that VC/PE funds are viewed as having inside information and as these investors attempt to
time the market to realize returns, the sale of shares is a signal of overvaluation. However, the
market also reacts negatively to the resignation of VC/PE representative directors which
suggests that shareholders value the influence the VC/PE firm has on value creation in the
firm. The event study results are robust to alternative specifications including using ScholesWilliams beta to adjust for thin trading.
8
We split the sample based on market conditions (the return on the market index in the 3 months prior to the
transactions) and compare the announcement returns for the buy and sell decisions. However, there is not a
significant difference in the announcement returns.
12
3.3 Cross Sectional Results
Correlations for each of the explanatory variables used is provided in Table 3. The percentage
of the firm owned by the VC/PE investor is negatively correlated with number of years since
the original investment, which is consistent with VC/PE funds selling their holdings down
over time. In addition, syndication is negatively correlated with fund size, consistent with
larger, more reputable funds having less need to share the risk of an investment, and
positively correlated with number of years since the original investment.
<Insert Table 3 here>
We use a regularized regression model to regress the announcement returns for each type of
transaction on transaction, VCPE and deal characteristics in Table 4.
<Insert Table 4 here>
The results suggest that for buy transactions there is a significant positive relationship
between the market reaction and percentage ownership of the VC/PE investor. This suggests
that shareholders place a higher value on VC/PE investor’s greater influence in the firm.
Further there is a significant positive relationship between the market reaction and whether
the VC/PE investment was syndicated. Deals are often syndicated to share risk between
investors and thus the willingness of an original investor to increase their shareholding in the
firm suggests a reduction in firm risk to the VC/PE investor. In addition, the market reaction
is significantly positively related to VC/PE reputation, which suggests that shareholders place
13
a greater value on the involvement of larger/older funds where larger/older funds generally
have a higher reputation.
In terms of sell transactions, there is a significant negative relationship between VC/PE
reputation and the market reaction. This suggests that shareholders place a greater value on
the involvement of larger/older funds where larger/older funds generally have a higher
reputation.
However, we do not find any significant relationships between the market
reaction for exit transactions and the explanatory variables. This is likely driven by the small
sample size. Our results across the transaction types are generally consistent when we control
for firm characteristics such as leverage and market value.9
In addition, we regress the director resignation announcement returns on director and firm
characteristics in Table 5.
<Insert Table 5 here>
However, there are no significant relationships between the market reaction to director
resignations and the explanatory variables.
4. Conclusion
The ability to assess the impact of continuing VC/PE ownership in the firm after listing is
restricted by the limited disclosure requirements for these types of investors and that in the
U.S, many VC firms distribute shares in their listed portfolio firms to their investors (limited
9
We also control for market conditions using the return on the market in the three months prior to the
transaction and find similar results to Table 4.
14
partners), who subsequently sell these shares without any SEC reporting obligations. Thus,
while there is a substantial literature on the IPO exit decisions of VC/PE funds, it is not
possible to examine directly the trading behaviour of VC firms post IPO in the U.S market
(Bradley et al., 2012).
There are a number of features of the Australian market which provide a unique opportunity
to analyse the direct impact of a change in a VC/PE fund’s share holdings in a listed firm
around the time that the transaction occurs. First, unlike the U.S, Australian VC/PE funds sell
their share holdings in their listed portfolio firms and distribute the proceeds to their investors
(limited partners). Australian VC/PE funds have longer post IPO investment holding periods
than U.S VC/PE funds and most Australian VC/PE funds retain a stake in the firm post listing
and are often substantial shareholders. Second, substantial shareholders in listed firms have to
disclose any changes in their shareholdings to the stock exchange. This allows us to analyze
the value that shareholders place on VC/PE funds in the firm post IPO. If VC/PE funds have
a positive influence on the firm and value creating mechanisms, then the market should react
negatively to the withdrawal of VC/PE funds from the firm and board of directors.
We analyze the market reaction to buy and sell share transactions and the resignation of
directors of VC/PE funds in publically listed firms, where the original VC/PE investment was
made prior to IPO. We find that buy transactions have a positive market reaction and sell and
exit transactions, a negative market response. This suggests that VC/PE funds are believed to
create value in their portfolio companies, from which the funds themselves and all other
investors benefit. As soon as the VC/PE investor leaves the portfolio companies, this value
creation process ends. Hence, investors discount the lack of future value creation by the funds
from the portfolio companies’ share values as soon as they discover that the fund managers
15
have started divesting the portfolio company. In addition, director resignations have a
negative market reaction suggesting that shareholders value the contribution to the firm that
VC/PE funds make through their representation on the board.
The cross sectional results suggest that shareholders place a higher value on VC/PE funds
that have a greater influence in the firm. There is a significant positive relationship between
the market reaction and percentage ownership of the VC/PE investor in buy transaction. In
addition, the market reaction is significantly positively (negatively) related to VC/PE
reputation for buy (sell) transactions, which suggests that shareholders place a greater value
on the involvement of larger or older funds/firms where these funds generally have a higher
reputation.
Our results shed some interesting light on VC/PE funds’ involvement in investee firms once
they are listed on the stock exchange. Generating investor returns within the shortest possible
period of time is among the main goals of VC/PE funds. It could therefore be assumed that
VC/PE funds try and dispose of their investments as quickly and swiftly as possible.
However, this does not seem to generally be the case. Negative (positive) capital market
reactions to fund sales (purchases) and director resignations can be interpreted as an
indication that capital markets, especially the firms’ other shareholders, are strongly in favour
of VC/PE funds being involved in the portfolio companies.
16
Table 1
Announcement and Firm Characteristics of VC/PE fund holdings and director seats in 41
IPOs over (1996-2009)
The mean values for variables are presented
Panel A : Change in shareholdings
No transactions
No VC/PE firms
No VC/PE funds
Change in ownership %
No years from IPO
No years from investment
Leverage
Firm size
Ownership % after transaction
PE (%)
Panel B : Director resignations
No transactions
Tenure as director
No of seats at IPO
Ownership % at resignation
Leverage
Firm size
PE (%)
***
All
90
28
31
-4.04
2.08
4.68
0.27
86.02
12.46
26.7
Buy
29
13
15
3.08
2.08
3.99
0.19
41.79
24.09
3.45
Sell
41
23
24
-5.96
2.12
4.94
0.28
121.77
10.30
32
Exit
20
20
20
-10.44
2.00
5.30
0.37
76.86
0.00
50
Buy-Sell
-12
-10
-9
***
9.04
-0.04
-0.95 *
-0.09 **
-79.98**
13.79 **
-28.55 ***
26
2.93
1.53
9.89
0.34
89.70
38.5
Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level
Change in ownership % = Difference in percentage shareholdings prior to post transaction as disclosed in the
change in substantial shareholding notice
No years from IPO = number of years between the transaction date and the listing of the firm on the ASX
No years from investment= number of years between the transaction date and the initial investment in the firm
by the VC/PE investor
Leverage = Total Liabilities over Total Assets at the yearend prior to the announcement
Firm size = Market value of the firm measured as the number of shares outstanding multiplied by the closing
share price on the day before the announcement
Free cash flow= operating activity cash flows minus cash dividend minus capital expenditure over total assets at
the yearend prior to the transaction
Ownership % after transaction = shareholding of the VC/PE after the transaction as disclosed in the change in
substantial shareholding notice
PE= percentage of investors classified as a PE manager or fund
Tenure as director= number of years between appointment as director and resignation
No of seats at IPO = number of seats on board of directors at IPO held by VC/PE investor
Ownership % at resignation = Percentage shareholding of VC/PE fund represented by director at time of
resignation
17
Table 2
Daily average abnormal returns and cumulative average abnormal returns for transaction
announcements in 41 IPOs over (1996-2009)
Day lists a cut-out of the event window relative to the announcement day (0). AAR is the
mean abnormal return. Significance is tested using a Z test and the generalised sign Z, which
is the non-parametric test statistic for a significant difference from zero.
Day
-3
-2
-1
0
1
2
3
[-1,0]
[0,1]
[0,2]
[-1,1]
[-2,1]
[-10,-2]
***
(1)
Buy (n=26)
AAR
1.44
-1.71
-0.57
1.59**
0.81
1.86**
0.45
1.02
2.40**
4.26***
1.83
0.12
-5.56*
(2)
Sell (n=35)
AAR
-0.09
0.20
-1.08
-0.02
0.68
-1.44**
0.35
-1.10
0.65
-0.79
-0.42
-0.22
2.38
(3)
Exit (n=17)
AAR
-0.90
1.23
0.68
-0.01
-1.81*
-0.01
-0.08
0.67
-1.82*
-1.82
-1.14
0.09
7.34**
(4)
Resignation (n=26)
AAR
Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level
18
-1.82
-0.20
-1.24
-2.72**
0.99
0.72
0.34
-3.96***
-1.73
-1.01
-2.97*
-3.17
-1.04
Table 3
Correlations of explanatory variables for the market reaction to buy and sell transactions by VC/PE funds in their listed portfolio firms in 41
IPOs over (1996-2009)
Change in
ownership %
Change in ownership %
Ownership % after transaction
Ownership %
after transaction
1.00
VC/ PE
reputation
No of
rounds
No years from
investment
0.43***
-0.04
-0.11
0.30*
-0.15
1.00
-0.05
0.04
-0.01
-0.32**
1.00
-0.41***
0.19
0.40***
1.00
-0.08
-0.09
1.00
0.05
Syndicated
VC/ PE reputation
No of rounds
No years from investment
***
Syndicated
1.00
Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level
Change in ownership % = Difference in percentage shareholdings prior to post transaction as disclosed in the change in substantial shareholding notice
Ownership % after transaction = post transaction percentage shareholding
PE= one if the investor is classified as a PE manager or fund
VCPE on board = one if the VC/PE investor sits on the board of directors at listing
Syndicated = one if the VC/PE investment was syndicated
VC/ PE reputation = size of fund in USD
No of rounds= number of rounds of VC/PE financing received by the firm before IPO.
No years from investment= number of years between the transaction date and the initial investment in the firm by the VC/PE investor
19
Table 4
Regularized regression of explanatory variables on the market reaction to buy and sell
transactions by VC/PE funds in their listed portfolio firms in 41 IPOs over (1996-2009)
The dependant variable is the mean abnormal market adjusted return.
Transaction type
Change in ownership %
Ownership % after transaction
VC/PE on board
Syndicated
VC/PE reputation
No of rounds
No years from investment
Constant
N
F-value
R2
***
Buy
CAR(0,1)
Buy
CAR(0,1)
0.81**
73.49***
12.62*
27.12***
0.26***
0.58
1.56**
-50.98***
5.86
23.52**
0.24***
-0.68
0.13
-22.06**
20
6.69***
0.67
2.39*
0.36
20
Buy
CAR(0,1)
0.22
66.63***
12.53*
28.32***
0.27***
0.37
1.47
-62.53***
20
5.56***
0.65
Sell
CAR(0,2)
3.99
-0.10
0.62
-0.02**
-0.39
0.26
-1.31
26
1.80
0.40
Sell
CAR(0,2)
0.010
0.18
0.68
-0.02**
-0.45
0.19
-0.55
26
1.54
0.36
Sell
CAR(0,2)
0.002
3.96
-0.08
0.65
-0.02**
-0.40
0.26
-1.29
26
1.46
0.36
Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level
Change in ownership % = Difference in percentage shareholdings prior to post transaction as disclosed in the
change in substantial shareholding notice.
Ownership % after transaction = post transaction percentage shareholding.
PE= one if the investor is classified as a PE manager or fund.
VC/PE on board = one if the VC/PE investor sits on the board of directors at listing.
Syndicated = one if the VC/PE investment was syndicated.
VC/PE reputation = size of fund in USD or age of VC/PE firm at time of transaction.
No of rounds= number of rounds of VC/PE financing received by the firm before IPO.
No years from investment= number of years between the transaction date and the initial investment in the firm
by the VC/PE investor
20
Table 5
Regularized regression of explanatory variables on the market reaction to resignations of
directors that represent VC/PE funds in their listed portfolio firms for 41 IPOs over (19962009).
The dependant variable is the mean abnormal market adjusted return.
AR(0)
0.57
-1.06
-0.03
0.01
1.20
1.98
-8.17
26
0.19
0.20
Tenure
Ownership % at resignation
Leverage
Size
PE dummy
No of seats at IPO
Constant
N
F-value
R2
***
CAR(-1,0)
1.15
11.29
0.84
0.01
3.00
0.90
-12.37**
26
0.63
0.15
Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level
Tenure as director= number of years between appointment as director and resignation.
Ownership % at resignation = Percentage shareholding of VC/PE fund represented by director at time of
resignation.
Leverage = Total Liabilities over Total Assets at the yearend prior to the announcement.
Firm size = Market value of the firm measured as the number of shares outstanding multiplied by the closing
share price on the day before the announcement.
PE= one if the investor is classified as a PE manager or fund.
No of seats at IPO = number of seats on board of directors at IPO held by VC/PE investor.
21
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